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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Self employment taxes if residing in a foreign country

Customer Question

Question:

I am moving to Costa Rica with my family to conduct a financial consulting practice there. I will have Costa Rican residency visa, will purchase a house and will be living there except for vacations when school is out.

I plan to set myself up as an independent contractor.   I expect that I will earn less than the $80000 of earned income which can be excluded from U.S. income tax on Form 2555 Foreign Earned Income Exclusion.

Due to the ability to take many deductions not allowed under U.S. tax laws I do not expect to own any Costa Rican income tax.

Costa Rica does not have any tax treaties with the U.S. covering income tax or binational social security agreements.

Costa Rica doesn't have an exact equivalent of our social security law. They do have a plan in which payments (about 12% of taxable income) is paid into a plan which provides a pension at age 60 and government sponsored health care.    It is optional for any independent contractor and since I am already 55 years old, has little to offer me.

Question: Do I owe self employment taxes on my income which is excluded from U.S. income tax under Form 2555?

If I do owe U.S. self employment taxes would I owe these taxes if I paid Costa Rican “social security?

Thanks for your help
Ron Edinger
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

Pursuant to IRC Sec. 1402(a) " In addition to other taxes, there shall be imposed for each taxable year, on the self-employment income of every individual ... self-employment tax". Thus, self-employment income is subject to self-employment tax. Pursuant to IRC Sec. 1402(a)(11), "the exclusion from gross income provided by section 911(a)(1) shall not apply". Thus, the foreign earned income exclusion may not offset or otherwise reduce self-employment income for purposes of calculating the self-employment tax.


The botXXXXX XXXXXne is that you are liable for self-employment tax on your self-employment earnings in Costa Rica. Also, the U.S. does have a totalization agreement with about 16 other countries that would otherwise exempt you from foreign social security taxes. However, Costa Rica is not a signatory. Thus, you may end up paying those taxes as well.


Is there any chance you can be employed as an employee? If so you can avoid the self-employment tax aspect of this.

Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
Christopher Phelps and 3 other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: To Mr Phelps, CPA,
Thank you. I believe your answer is correct. I tried to add a bonus but did it wrong. I am posting another question in a few minutes and if you answer it then I will try to add a bonus
Ron Edinger
Expert:  Christopher Phelps replied 11 years ago.

Thank you for your generosity. You can accept this message rather then post a new one. Let me know if you need any clarification.


Thanks.

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